U.S. Oil and Gas Drive Global Markets

David Fessler By David Fessler, Energy and Infrastructure Strategist, The Oxford Club

Oil & Gas

A few days ago, I wrote an article titled “Will OPEC’s Cuts Ignite a U.S. Shale Boom?” If you missed it, you can read it here.

In it, I talked about how once OPEC slows down, U.S. producers will quickly steal that market share. That’s because U.S. exploration and production companies are quickly learning how to find, extract and produce some of the highest-quality and cheapest oil and gas in the world.

How have U.S. producers been able to get ahead of the rest of the world? By exploiting unconventional shale oil and gas formations.

It’s possible because of good old Yankee ingenuity and my favorite word: technology. Remember Dave’s Laws of Technology:

  1. Technology marches on.
  2. When it comes to technology, changes happen much faster than you’d expect.
  3. Initially, new technology can be uncomfortably disruptive.

That first law is my favorite.

Truth is, technology doesn’t discriminate. Technological advances affect every aspect of our lives.

Some of them – like smartphones – are obvious to us.

But sometimes technology affects our lives in less obvious ways. Advancements that have improved oil and gas extractions are the perfect example.

Think about this… Today, U.S. E&P companies are producing as much oil from tight shale formations as they did two years ago.

There’s just one big difference: They are using just one-third the number of drill rigs to do it.

How is that even possible?

The answer is technology. Today’s unconventional wells have longer horizontal laterals. This is the length of drill pipe that follows the oil- or gas-bearing layer.

Just five years ago, the average lateral was no more than 5,000 feet in length. Today, laterals are 10,000 feet or more in length.

Technology that allows drillers to steer the drill bit in any direction are now commonplace. They enable drillers to follow the oil-bearing layer up and down and left and right with ease.

In addition to drilling technology, fracking technology has improved, too. More sand, higher fracking pressures and closer hole spacing in laterals have boosted well production rates.

Researchers who compiled Exxon Mobil’s annual forecast “Outlook for Energy: A View to 2040” said it best…

“Technology will continue to be the driver of all things possible in the energy world.”

Remember it wasn’t long ago that the prevailing thought was world oil production was at a peak.

Now that kind of talk seems silly. Every year, unconventional oil production increases and even approaches our 1970 peak of 10 million barrels per day.

Unconventional crude production is going to continue to increase. New technology continues to enable E&P companies to unlock oil once considered too costly or difficult to extract.

Growth in U.S. crude production means the U.S. could be a net exporter of crude by 2025.

Conventional oil production peaked in January 2011. But almost coincidentally, unconventional oil production (mostly in the U.S. and Canada) took off.

It has dropped off slightly since mid-2015. But that’s due to Saudi Arabia’s attempt to maintain market share by overpumping.

However, from this point forward, lean and mean U.S. E&P crude producers are in the driver’s seat. There are plenty of Permian producers that are profitable with oil at $40 per barrel.

I wrote about this in my previous article. However, I think future technology will allow nearly every North American shale producer to make money at today’s oil prices.

As those advances happen, more U.S. crude producers will take even more world market share away from OPEC and the Russians.

And in my book, there’s nothing wrong with that. I’ll be keeping my eye on the oil markets and U.S. shale technology developments.

Good investing,

Dave